Convex Hull Pricing in Electricity Markets: Formulation, Analysis, and Implementation Challenges

Recent widespread interest in Convex Hull Pricing has not been accompanied by an equally broad understanding of the method. This paper seeks to narrow the gap between enthusiasm and comprehension. The connection between Convex Hull Pricing and basic electricity market clearing processes is clearly developed, and a new formulation of the pricing problem is presented. From this formulation, several important consequences of the method are derived and discussed. Some counterintuitive properties of Convex Hull Pricing are highlighted and demonstrated with simple examples. It is hoped that this paper will spur additional research on Convex Hull Pricing so that an informed judgment can be made regarding its costs and benefits.